A couple of things reminded me this week that the biggest risk for an investor
can sometimes – and counter-intuitively – be trying to keep out of trouble.

We are hard-wired to run from danger, which made sense when our principal concern was not getting eaten but is less helpful today when trying to make money in the markets.

The first reminder came in Warren Buffett’s annual letter to shareholders, in which he pointed to “hand-wringing” chief executives who have sat on their hands, refusing to invest in their businesses despite record levels of earnings and cash.

Not so Buffett, who invested more into the companies owned by his investment vehicle, Berkshire Hathaway, than ever before.

“Charlie [his business partner] and I love investing large sums in worthwhile projects, whatever the pundits are saying,” is how he puts it, justifying his decision, as only Buffett can, with the title of a song – “Every Storm Runs Out of Rain”.

Investing, the Sage of Omaha adds, is a game with the odds stacked in favour of success in the long run, which is why his preferred investment period is “forever”. His conclusion: “The risks of being out of the game are huge compared to the risks of being in it.”

I was reminded of Buffett’s letter later in the week when I stopped by our real estate investment team to talk through what looks like another example of excessive risk aversion.

The opportunity this has thrown up is in the secondary real estate market, which in the UK property business means pretty much everything outside the West End and City of London.

Real estate is not the only area in which investors have shied away from risk in recent years. The flight to safety in government bonds is the most obvious case in point.

But few have demonstrated such a spectacular preference for perceived safety in the past four years as property investors. Money has poured into prime central London assets while demand for almost everything else has been non-existent.

As a consequence, the gap between the yield on prime and secondary properties in the UK market, as tight as 1.2pc in 2007, had blown out to an unprecedented 5.8pc by the end of last year.

As in the bond market, yields in real estate rise when prices fall and the slump in investor demand for offices in places such as Birmingham and Manchester has seen the average yield on these secondary assets rise to an all-time high level of around 11.5pc.

So, while the yields available on perceived safe havens such as cash, government and some corporate bonds are lower than ever, the yield on secondary property is right at the top of its historic range. Quite simply, the asset class has never been cheaper.

Often in investment there is a good reason for suspiciously low prices and investments only look so compelling because you’re the only one who doesn’t know what’s really going on. At other times, however, the markets just get it wrong because they over-estimate the real risks.

This is what happened in 2008 in the bond market. As the chart shows, the yield on corporate bonds spiked when investors feared the global financial system might implode but quickly came back in when it became clear that Armageddon had been deferred.

The yield on secondary properties rose in line with bonds at that time but since then it has carried on widening to the extent that the available returns are out of kilter with economic reality.

Low interest rates have made this a very unusual downturn, one that many companies have been able to navigate largely unscathed, able to pay their rent and keep their landlords happy.

In fact, if you strip out obvious red flag areas, such as parts of the high street, the probability of insolvency in the UK corporate sector is lower than it was in 2009.

The market, preoccupied with safety, is not doing a good job of distinguishing between the real and the merely imagined risks.

As with any investment, the price you pay at the outset is the key determinant of total return and the main, and most reliable, contributor to that return is income, not capital appreciation.

A starting point of a double digit income yield stacks the odds in favour of a very satisfactory return.

Property is a corporate bond in the form of a building and no more risky – it just comes with three times the income.

Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at @tomstevenson63